Our goal is to help you focus on growing your business, not dealing with investors; we want to be as easy-to-use as possible.
We don’t prioritize growing our stake over time. Rather, our goal is to maximize the value of our investment, which often means raising further capital sparingly or not at all.
In some investments, we use the same toolkit as most VCs: traditional preferred equity or convertible note instruments, typically based on the National Venture Capital Association standard term sheet.
However, in some situations we offer a simple, standard “flexible VC” investment instrument, which functions similarly to a convertible note with a release valve; founders can easily buy us out. This enables you to choose the path that’s best for your company: pursue traditional VC accelerated growth without profitability, or become a profitable company organically and buy us out.
Here’s an overview of our typical “flexible VC” structure:
|Company||[Company name] Inc., a [State] corporation|
|Purchase Amount||Total amount invested in the round. We prefer to be the lead investor.|
|Purchase Date||Anticipated date of funding investment.|
|Percentage||“_____%, subject to redemption as provided below”. The ownership % we convert into if a company chooses to raise a round or sell. We use a simple fixed % as it avoids much of the confusion and signaling associated with valuations or valuation caps. If a company raises, we convert our % ownership into preferred equity prior to the pending round and receive pro rata rights to maintain that % in that round.|
|Conversion Trigger||“$__,000,000 round of preferred.” The amount of follow-on financing that, if raised, triggers our conversion to equity. Such triggers typically range from as low as $500K to as high as $5M.|
|Redemption Start Date||“____ months after Purchase Date.” The date founders begin repurchasing our equity option with a percentage of gross revenue. These dates typically range from 12 to 35 months after the date of our investment.|
|Redemption Amount||“_____% of the Company’s gross revenue, as defined by GAAP.” Percentage of gross monthly revenue founders allocate to redeem our ownership position; ranges from 3-7%|
In the event that a company raises or sells, our terms function identically to a standard convertible note, with our then-current % ownership converted to equity or cash/stock (in the event of an acquisition). This conversion happens on a pre-money basis and retains a pro-rata right in the pending round to maintain our ownership %.
If a company foregoes further fundraising, they will begin to repurchase our ownership position, using a fixed percentage of gross revenue. Each redemption, therefore, reduces our ownership in the company and correspondingly increases the founders’ ownership. This allows the founders to repurchase up to 90% of our position via scheduled redemption payment, a single lump sum payment, or a combination of both — until they have redeemed 3X the Purchase Amount.
Here’s a summary of how our model compares with traditional VC:
|Factor||Traditional early-stage VC||Our Model|
|Autonomy and optionality||Initially high, but you almost always lose control over time. Typically locks you into taking more VC and growing your company according to VC needs||High|
|Time requirement||Typically 1-3 months of due diligence||Planned typically 2-4 weeks|
|Processing/ Legal costs||Legal costs typically $25K-$50K||Planned several thousand dollars|
|Cost of capital||Cost of VC funding to a unicorn CEO can easily be the equivalent of paying well over 100% annual interest||Low double digits|
|Typical business||Unprofitable business requiring ongoing VC subsidy||Business with clear roadmap to profitability|
|Ability to terminate||Expensive, difficult, and time-consuming||Easy, pre-negotiated option to buy us out|
|Financial management obligations||Low||Material, as you may have ongoing monthly payment obligations|